Katrina Plays, Part II

We asked…They answered.

Yesterday afternoon, we dispatched an email to various
colleagues, acquaintances and investment gurus to solicit
their favorite "Katrina plays."

Almost everyone replied. So please permit us to share a
sampling of their responses.

1) Dan Denning, editor of the Strategic Options Alert and Strategic Investments, predicts, "The homebuilding sector
will be one of the biggest beneficiaries of last week’s
disaster. I’ve been pretty bearish toward the homebuilders.
But I’m trying to curb my bearish urges for the moment.
Because of the economic trauma wrought by the hurricane,
the Fed is unlikely to continue hiking rates. Will a rate-
hike-freeze on the part of the Fed give the housing bubble
longer life? We’re about to find out. But the early answer
appears to be yes. The homebuilding stocks have been
soaring over the last few days.

Net-net, I suspect the monetary aftereffects of the
hurricane will give the homebuilders a second wind…so to
speak.

2) Chris Mayer, editor of the Crisis Point Trader and the Fleet Street Letter, writes, "Almost anything related to
timberland should do well. US lumber prices rose more than
17% last week, as the hurricane wiped out several saw mills
and leveled timber inventories around the Gulf coast. In
addition to these supply-side constraints, the rebuilding
effort throughout the Gulf states will certainly boost
demand for timber products.

"In Fleet Street’s model portfolio, we hold Plum Creek
Timber (NYSE: PCL), the US timberland REIT. Out of
curiosity, I looked back to see how Plum Creek performed
after hurricane Andrew in August of 1992. Andrew, of
course, was the most destructive U.S. hurricane on record,
prior to Katrina. In the two years following Andrew, Plum
Creek’s shares more than doubled, trouncing the performance
of the S&P 500 over the same timeframe. History seems
likely to repeat itself.

"Although less than one percent of PCL’s timberland
holdings lie within the state of Louisiana, the company own
lots of timberland in the surrounding areas. These local
stands of timber are likely to be key sources of supply in
the rebuilding effort. But even without any Katrina-induced
benefit, the merits of owning timberland stocks like Plum
Creek are considerable. This ‘slow and steady’ REIT has
produced an astonishing 600% return since August of 1992,
more than double the S&P 500’s return over the same time
frame.

"At worst, therefore, PCL should continue to deliver
worthwhile, long-term returns."

3) "Cha-Ching!" says Karim Rahemtulla, editor of the LEAPs
Option Trader, "That’s the sound that most gamblers playing
slot machines like to hear. There is something about the
sound of coins falling into the tray that makes slot
machine gambling more fulfilling… if you’re into that
sort of thing.

"One of the biggest players in the slot business is
International Game Technology (NYSE: IGT). After several
years of high growth, the company has begun to slow down.
This is about to change. Like PCs, slot machines have a
lifecycle that requires updates and replacements. That
cycle is just beginning, according to industry followers.
But that would not be reason enough to own IGT. There is
more to this story…and hurricane Katrina is a part of it.

"First, IGT will produce the replacement machines for many
of the casinos that were damaged, and will be rebuilt, in
Mississippi, Louisiana and Alabama. Fear not! These
riverboat casinos will be back in operation soon, if for no
other reason than that they provide billions in tax
revenues to the storm-damaged states of the Gulf Coast.

"Second, Las Vegas hotels and casinos are likely to enjoy
boom-time conditions over the next couple of years, as
gamblers and conventioneers flock to Vegas in lieu of New
Orleans. (Unfortunately, the LEAP options on casino stocks
are sporting very high premiums right now, increasing our
cost to play them directly. But IGT options are much more
reasonable).

"Third, IGT is a big player in Asia’s new casino haven:
Macao. IGT already has international operations, which
contribute about 30% of the company’s revenues and income.
And this segment is growing. Once Macao really gets going,
in 2007, IGT could be in the thick of things in Asia. Right
now, the shares are sporting a price-earnings ratio of
about 21, based on earnings of $1.25 projected for this
year. If Macao takes off and the replacement cycle remains
in place and the casinos are rebuilt in the devastated Gulf
states, the company could grow its bottom line to about
$1.80 to $2 by 2008. My target price for this $27-stock is
$40 by 2008."

To take advantage of this opportunity, Karim recommends a
long-term, covered-call position, the details of which are
readily available in the latest missive from his LEAPS
Option Trader.

4) "The only real Katrina play I’ve found so far is a
reinsurance company that’s gotten hit because it
specializes in ‘retrocessional’ coverage," writes Dan
Ferris, editor of the beloved (by us) Extreme Value. "Conventional property and casualty insurers buy
reinsurance, then the reinsurers buy retrocessional
coverage.

"Because Katrina is such a big event, the primary insurers
will blow through their reinsurance limits and the retro
coverage will become heavily involved. One ‘retro’ company
with Katrina exposure fell almost 9% Wednesday. But it’s
dumb to sell these stocks now. Katrina, like Andrew in
1992, and 9/11 in 2001, will cause reinsurance and retro
premiums to go way up when renewals take place next year.

"Since there are less than ten companies in the world that
provide retrocessional coverage, the few companies that do
provide such coverage should have little trouble boosting
premiums and maintaining their pricing power. So 2006 is
going to be a great year for these stocks, which generally
trade at pretty cheap multiples anyway, because nobody
understands them. Next year, they’ll make a ton of money.
Even if the ratings agencies insist that they raise capital
to maintain ratings, the retrocessoinaires should be able
to put this excess capital to work at high rates of return.

"Unfortunately for the Rude Awakening readers, I can’t
divulge the details of the specific insurance stock that
I’ll be recommending in the next issue of Extreme Value,
due out online sometime today."

5) Last, but by no means least, Carl Waynberg, editor of
"The G.R.I.P. " (Growth in revenue, Relative strength,
Insider buying and Price-to-sales), recommends a small-cap,
environmental services stock. In fact, he recommended it to
his GRIP subscribers four weeks BEFORE hurricane Katrina
struck New Orleans. The fact that this small-cap stock has
more than doubled over the last four weeks has not dimmed
Carl’s enthusiasm for it. According to Bloomberg, the
company "corrects and directs compromised land and water
back to its revitalized state."

Carl provides a little more detail: "For this idea," he
writes, "we have to go back to 1991, when Texaco halted
operations in Lago Agrio, an environmentally sensitive
region of rainforest located in Ecuador’s northern Amazon
border. Texaco’s systematic dumping of crude oil and toxic
wastewater set off a flurry of lawsuits throughout Ecuador
and the U.S., including the first, filed by Lago Agrio
residents in New York a dozen years ago. Texaco (now
ChevronTexaco) argued for years it was not subject to the
jurisdiction of either U.S. or Ecuadorian courts. But in
2002, U.S. courts ordered the oil and gas behemoth to
accept Ecuadorian jurisdiction, marking the first time an
American oil concern was compelled by U.S. court order to
accept financial responsibility as imposed by a non-U.S.
court.

"Last month, Ecuadorian officials chose the company that
would clean up Texaco’s mess: Global Development and
Environmental Resources, Inc. (OTC: GDVE), which is
currently cleaning up more than 30 sites, many under the
EPA’s Brownfield’s Program. The company will use newly
acquired in-situ enzyme technology to decontaminate the 31-
by-62-mile area of Lago Agrio and its 350 ponds. The
environmentally-friendly product, which breaks down
contaminates, like PCBs, dioxins, pesticides, oil and heavy
metals into microscopic particles that are easily bio-
degraded, is approved by the U.S. Department of Agriculture
and various other state agencies.

I have not been able to determine whether FEMA officials
have approached the company regarding cleaning up
contaminated areas in and around New Orleans. But
obviously, a contract of that size and profile would be a
big deal for this little company.

And the Markets…